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As budgets tighten, contractors must address ethics risks

Jun. 23, 2013 - 02:59PM   |  
By ERIC R. FELDMAN   |   Comments

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Sequestration’s mandatory spending cuts occurred this year due to the failure of both parties in Congress to agree on a budget compromise. The federal government is in the process of furloughing personnel, cutting programs and reducing or canceling contracts to meet these unprecedented budget reductions.

Agencies will need to scale back the number and size of new contracts for programs deemed noncritical. Even critical programs will likely be impacted as agencies look for more efficient ways to use reduced funding.

As a direct consequence of sequestration, government contractors are facing a series of possible actions on existing contracts, all of which create challenges for managing their budgets, workforces and financial future. For example, funding limitations are already causing agencies to reduce the scope and quantity of products or services purchased on existing contracts.

The most likely scenario resulting from sequestration is that government contractors will see a decrease in the number of new contracts awarded as agencies eliminate programs deemed not essential to their missions. There may also be a change in the types of contracts awarded, with agencies moving away from contract vehicles that place cost and performance risk on the government. Indefinite-delivery/indefinite-quantity contracts will become more attractive for the government. Government contractors are already seeing a trend away from “best value” procurements toward “lowest-price, technically acceptable” proposals.

This intensified competition for fewer contracting opportunities can create a high-risk environment within companies. To win contracts, curb layoffs and minimize staff reductions, employees — particularly those in business development — may be motivated to ignore or marginalize their companies’ ethics policies. Others may feel compelled to inappropriately shift contract and overhead costs from affected contracts that have been reduced or de-scoped to government contracts not affected by cuts. Still others might be tempted to bid contracts at prices that will necessitate shortcuts on performance in terms of quality or timeliness. Such ill-advised actions can lead to government investigations, prosecutions, suspensions and debarments when contractors can least afford the reputational damage and subsequent loss of business.

Government contractors can take several common-sense steps to reduce the ethics risk, demonstrate their due diligence and avoid ethical disaster:

■ Companies should review their Code of Ethics and Business Conduct to make sure it is relevant to the ethical challenges of the current government contracting environment.

■ Now is a good time for senior leaders to re-emphasize the company’s commitment to ethics and integrity in business practices. Consider incorporating ethics objectives into performance evaluations alongside financial measures, for example, to incentivize employee behavior in a way that reflects these values.

■ Fundamental changes in the environment require contractors to reassess the adequacy of internal controls over the whole contracting network. An effective ethics and compliance program and a strong ethical culture need to extend to joint venture partners, subcontractors and suppliers because government agencies regularly take action against prime contractors for failing to “flow-down” contracting requirements.

Savvy contractors ask potential subcontractors about hiring practices, supply chains and information sources — and they share their ethics education programs with working partners that do not meet the current standards.

■ Suspensions and debarments of contractors by government agencies reached an all-time high in 2012. It is likely that decreasing budgets and increasing attention to contract integrity and performance will drive even more aggressive enforcement of Federal Acquisition Regulations in 2013. Contractors will need to guard against unsupported payment withholds by the Defense Contract Audit Agency while concurrently demonstrating their commitment to compliance.

■ Strong ethics and compliance programs have become a competitive differentiator in the contracting world. Proposals incorporating ethics assessments and education at the project level provide evidence of a commitment to accountability important to government agencies in this environment.

The immediate future for government contractors will be tense, but a renewed and demonstrable commitment to ethics and compliance activities can better position companies to maneuver today’s contracting uncertainties and to head off preventable problems.

Eric R. Feldman is managing director for corporate ethics and compliance programs at Affiliated Monitors Inc. He can be reached at http://efeldman@affiliatedmonitors.com/.

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